Stressed Out: Office Depot Is in Trouble Without Staples

Office Depot's financials are once again at the forefront as its merger with Staples flounders.

This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Office Depot's (ODP) performance in the coming months will be an interesting case study in what happens when mergers and acquisitions go awry.

Office Depot is a member of Real Money's Stressed Out index of 20 troubled companies that carry unsustainable debt loads and have a history of burning cash and resources in the absence of steady cash flow.

After rumors surfaced in late 2014 that Office Depot and rival office supplies retailer Staples (SPLS) were considering a tie-up, Office Depot's stock went through the roof. The stock more than doubled from its 2014 low of $4.05, peaking at $9.59 just days after the two companies entered into a formal merger agreement.

Office Depot has since settled in the $5 area, falling precipitously after FTC officials voted unanimously to file a suit to block the $6.3 billion merger.

Despite those headwinds, last week the companies announced their intent to extend their merger agreement and waive the agreement's termination date of Feb. 4. "This merger creates an unparalleled opportunity to better serve our customers and to deliver shareholder value," commented Staples CEO Ron Sargent. "We are committed to completing this transaction and look forward to a full and impartial judicial review."

On Monday, Staples announced that it was making changes to its leadership and cutting hundreds of corporate jobs. It is unclear whether the move has anything to do with its continued pursuit of merging with Office Depot. Office Depot has already announced plans to close 400 stores by the end of this year and over 1,000 store closures are expected to come if the deal is approved.

However, recently the New York Post reported that the FTC has no interest in changing its view on the matter.

With the company's merger seemingly dead in the water and its stock settled back to its natural level -- minus potential merger hype -- investors are once again beginning to look at Office Depot's financial position.

The most glaring concern of the company's financial profile is the fact that it has more than doubled its debt over the past four years. The company went from having debt of about $659 million in 2012 to $1.58 billion in 2013. Its debt level has remained in that area ever since.

However, despite the mounting debt, Office Depot has sufficient liquidity, between its $1.2 billion credit revolver and the $958 million in its cash reserves.

The company reported earnings of $0.16 per share on revenue of $3.69 billion in the third quarter, meeting analysts' expectations for the period. For the current quarter, analysts expect the company's earnings to decline 31% to $0.11 per share.

Earlier this year, activist investor Starboard Value cut its stake in the company to 5.5% from 8.9%. About 26% of Office Depot's shares are owned by hedge funds, according to Bloomberg.

Starboard had been one of the largest proponents of Office Depot's merger with Staples. "We have met with, and spoken to, a number of large Staples shareholders and Wall Street research analysts who strongly, and without exception, corroborate our view that this merger makes too much sense to ignore," said Starboard managing member Jeffrey C. Smith in January.

According to research firm Euromonitor, the U.S. market for office supplies sold in stores has been in a protracted decline since 2007, and totaled $11.7 billion in 2014. Staples' market share fell to 38.2% in 2014 from 40.6% in 2013, estimates Euromonitor.

Office Depot is back to where it was before the prospect of a merger with its biggest rival was seen as a possibility. If the tea leaves are accurate and a merger is not forthcoming, the company may be in for a rough time ahead.

The insider purchases were at an oil refiner, a video game maker and a retailer of recreational vehicles.

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